It is all about how much you keep after taxes – not what you earn from your job, a business, or investments. While it is always great to see fabulous investment gains, the only financial metric that really matters is what is in your bank account at the end of the day. One of the ways you can influence this is by minimizing the taxes you pay on your investments.

Unfortunately, many people do not think about how taxes impact their investment returns until near the end of the year; however, you should act all year round. Taking part in investment tax planning throughout the year will give you opportunities to keep more of what you earn. Here are some rules and strategies to keep in mind.

Know When to Take Your Losses

Psychologically, many investors are averse to taking losses, holding out to “make their money back.” Instead of emotion, logic and investment acumen needs to be applied here. If an investment does not have a fundamental reason to turn around, then you are better off selling it and taking a tax loss.

Losses reduce taxes on either your capital gains for the year or, when losses exceed gains, up to $3,000 on other income. Excess losses can be carried forward to future years. Plus, you will have the proceeds to reinvest in something more likely to produce a return.

Let Winners Run

Unlike long-term capital gains, short-term capital gains are taxed as ordinary income. This means your marginal income tax rate (the highest rate applied to you) can impact your investment gains.

While you should not let the tax tail wag the investment dog, ideally you want to hold a winning investment for at least a year and a day to benefit from long-term capital gains tax treatment. This means you will pay only a 20 percent maximum tax versus whatever your marginal rate is.

As with losses, the fundamentals of the investment are key. Therefore you should not sell a holding if you think the gains are at risk just to save on taxes. If you believe in the investment for the long term, then holding out for preferred capital gains treatment can be a clever idea.

Give the Gift of Appreciation

Making charitable donations you would not otherwise give is generally not a viable tax strategy. However, if you are already charitably inclined then consider donating stock or mutual funds instead of cash.

When you donate property such as stocks, your charitable deduction is based on the fair market value of the asset on the date of the gift. It is much better to do this than donate cash.

For example, if you have a stock you purchased for $35 and it is now worth $135, when you donate it you will receive a charitable deduction of $135. If you were to sell the stock first, you would have to pay tax on the $100 gains and then have only $103 to donate in cash – assuming you are in the 32 percent tax bracket. The only winner in this situation is the IRS; both you and the charity lose. This is because the charity is excluded from paying capital gains taxes on the appreciation that occurred while you owned the asset.

Hold Until You Die

This strategy does not benefit you directly, but rather your heirs. When someone inherits an asset such as real estate, stocks, bonds, mutual funds, etc., the cost basis of the asset is reset to the fair market value at the date of death.

This means that if you have stock in company XYZ that you bought for $50 and now it is worth $500, you would pay tax on the gain of $450 per share. However, your heir would pay $0 if he sold it on the day you died. If your heir continues to hold the stock, the benefit still applies as his cost basis in the stock of XYZ would reset to $500, so he will pay taxes only on gains over that amount.

Conclusion

While you should never cheat on your taxes or do anything unethical, it is foolish to pay any more than legally necessary to the IRS. Engage in investment tax planning year-round and you may see better after-tax returns and more money in your bank account.

One highlight of the recently passed Inflation Reduction Act of 2022 (IRA; HR 5376) includes modifications to what is more commonly referred to as EV credits. Specifically, Section 30D of the Act is where the most important modifications are, and where the present tax credit for electric vehicles is spelled out in the U.S. Code. There is also new stimulus for previously owned electric vehicles, industrial vehicles and “alternative fuel refueling property.”

According to the Joint Committee on Taxation’s estimates, in lieu of what was previously known as the credit for plug-in electric vehicles, there is now a new clean vehicle credit. It is expected to be worth $7.5 billion over the next decade. Other noteworthy tax credits include $1.7 billion for “alternative fuel refueling property,” $1.3 billion available for buying a previously owned qualified plug-in EV, and $3.6 billion in tax credits for qualified commercial clean vehicles.

How the IRA Changes Section 30D and EV Tax Credits

For eligible, new clean vehicles, purchasers may receive $7,500 in federal tax credits and $4,000 for similarly used vehicles. It is important to note that taxpayers who purchase such vehicles are eligible for this tax credit if their modified adjusted gross income (MAGI) during the current or preceding tax year is no greater than $300,000 for joint filers; $225,000 for heads of household; and $150,000 for single filers. It is also limited to pickup trucks, vans, and sport utility vehicles up to a MSRP of $80,000. All other vehicles costing up to $55,000 are similarly eligible.

Critical Mineral Standards

Another important qualification for this tax credit is if the vehicle’s battery has a minimum threshold of critical minerals and if it has been processed in the required geographies. Section 30D(e) requires progressively increasing percentages of critical minerals either processed or extracted in the United States or another country the U.S. has an existing free-trade agreement with. If the stated percentages are recycled in North America, a vehicle’s battery components may also qualify for the tax credit.

Once guidance is issued by the U.S. Treasury and before the start of 2024, there must be at least 40 percent of eligible critical minerals to qualify. Vehicles placed in service in 2024 must have at least 50 percent critical minerals in their batteries. Critical minerals must be 60 percent, 70 percent and 80 percent of a battery’s components in 2025, 2026 and after Dec. 31, 2026, respectively. Dependent on future guidelines developed by the Internal Revenue Service, manufacturers will have to sign off on battery component makeup.

Requirements for Battery Manufacturing/Assembly Requirements

According to Section 30D(e)(2), prior to Jan. 1, 2024, at least half of the components of an EV battery must be assembled or manufactured in North America. Starting in 2024 and through 2025, 60 percent of a battery must meet such requirements. Beginning in 2026 through 2028, this requirement will increase by 10 percent annually, eventually requiring 100 percent of a battery’s construction to meet these standards beyond Dec. 31, 2028.

Other Considerations for Tax Credit Eligibility

If any critical minerals were extracted, handled or recycled by a “foreign entity of concern,” it is prohibited by the IRA for tax credit eligibility. Similarly, final assembly also must take place within North America to retain eligibility for the tax credit. Being considered a “qualified manufacturer” is another requirement that is necessary to maintain tax credit eligibility. This is any manufacturer that adheres to the EPA’s Title II Clean Air Act rules.

With the push for cleaner and greener energy evolving, this is one of many tax credits for consumers and businesses alike to reduce emissions and navigate the U.S. Tax Code.